10 Things You Need to Know About SWP (Systematic Withdrawal Plan): Monthly Income from Mutual Funds

Pijush Biswas

21 Apr 2018

Do you have a lump sum amount of money with you? And do you use a small part of this money on a regular basis? If yes, then obviously you haven’t used that money to invest at all. There is a way to easily invest that money and still have a regular income every month.

Mutual fund schemes offer various easy, smart and convenient options to meet specific needs of investors. Many investors want regular income from their mutual fund investment, similar to receiving a salary. For this mutual funds offer Systematic Withdrawal Plan (SWP).

Here is the list of 10 things you should know about SWP

1. What is an SWP?

SWP stands for Systematic Withdrawal Plan. SWP is the lesser-known twin of SIP (Systematic Investment Plan). SIPs have gained immense popularity in India in recent times. SWPs does the reverse of what SIP.

In SIP, you invest an amount in a mutual fund regularly at a definite interval such as interval such as weekly, monthly, quarterly etc., Whereas in SWP, a fixed amount can be withdrawal at fixed intervals. Moreover, the frequency and amount of withdrawal can also be selected by the investor.

For example, if an investor has invested ₹50,000 in a scheme, he can set up an SWP to withdraw ₹5,000 every month on a specific date for 10 months.

So instead of eating into your savings, you can put it in a mutual fund and withdraw regularly from it. This way, you can take only what you need and let the remainder of your money generate more wealth for you.

If the amount you withdraw is less than the amount your mutual fund generates, you can continue withdrawing from this fund forever.

2. Types of SWP

There are, in general variants of SWP. One is fixed amount withdrawal and the other is appreciation withdrawal.

In the first, a fixed sum is redeemed on the SWP date. In the other, any appreciation that has happened in the scheme as on the SWP date is redeemed from fund periodically.

3. Surety of Fixed payout

A Systematic Withdrawal Plan (SWP) gives surety of a stable payout to the investors at predetermined intervals. This implies that at some stage the investments will be completely repaid along with the gains in the hand of a mutual fund investor.

Hence, an investor is assured of getting a fixed amount at his/her pre-determined frequency through an SWP.

If the fund’s performance is good, the SWP will last longer. If the performance is poor, it’ll finish sooner. And if your annual withdrawal is less than what the fund generates every year, you can continue earning from this mutual fund forever.

4. Reduced Exposure to Risks

Every investment has its share of risks. SIP takes advantage of averaging to help you reduce exposure to risk. SWP does the same.

If you’ve invested in a mutual fund in a lump sum manner, by withdrawing a fixed amount regularly, you ensure your returns are averaged and you are protected from any volatile market movements.

In the times when the fund is performing poorly, you’ll be selling more units of your mutual funds to withdraw. Conversely, when the fund is performing well, you’ll be selling a lower number of units to withdraw the same amount. Thus, over a long period of time, the effect is averaged.

SWP helps to avoid the trap of market timing at the time of redeeming the equity mutual fund units: Just as Systematic Investment Plans (SIP) avoid market risk at the time of investment, SWPs lower market risk at the time of redemption.

5. Provide Financial Independence to Your Family Members

In life, however, there are times your family members require your financial assistance to address their contingencies and personal issues.

In such a case, giving money in one go, i.e lump-sum amount isn’t the most helpful approach. Your loved ones might need your help for an extended period of time.

Under such circumstances, you can think of dedicating an SWP to a family member in need. Mutual fund houses have started offering you unique options to transfer money to your family members.

SWP facilitates you to withdraw a fixed sum of money from a mutual fund scheme regularly (say monthly, quarterly, half-yearly and annually) and hold the potential to clock returns on the remaining investments over a period of time.

For Example, the SBI Mutual Fund recently launched Bandhan SWP. It is a unique facility that allows you to systematically withdraw money from your investments with the mutual fund house and transfer it directly to the account of a beneficiary.

Bandhan SWP defines the relationship between a ‘Responsible Giver’ (Investor) and a ‘Confident Receiver’ (Beneficiary). It facilitates a regular payout which the beneficiary can use for monthly sustenance, additional financial support, lifestyle maintenance or recurring expenses.

6. Good Mutual Funds for SWP

There are no specific funds that are considered as good or bad for SWP. This method of redeeming your money, from a fund, can be employed depending on the need for cash of the investor.

In SWPs, one can select the amount one wishes to withdraw and the time period. SWPs can bring in a discipline in savings.

7. Calculation of SWP

Under SWP, if you invest a lump sum amount in a mutual fund, you can set an amount you’ll withdraw regularly and the frequency at which you’ll withdraw.

Let’s assume that you decided to withdraw an amount of ₹30000 per month. So every month, your investment in the fund will reduce by ₹30000. The amount left every month after withdrawal will continue to remain invested.

Use the above SWP calculator to know how much you can withdraw from your lump sum investments.

8. Taxation on SWP

Dividend Distribution Tax (DDT)

Apart from money market and liquid funds, DDT on all non-equity funds is 25% plus 12% surcharge plus 3% cess, totaling to 28.84% which is levied on dividend plan. But, in SWP, there is no dividend or any DDT thereof.

And recently, the Finance Minister, Mr. Arun Jaitley, in his final union budget speech has proposed to introduce DDT on all equity oriented mutual funds at the rate of 10%, to provide a level field across growth-oriented and dividend distributing schemes.

The dividend paid by mutual funds is not taxed in the hand of investors, but a dividend distribution tax (DDT) has to be paid by the mutual fund company. Fund houses have to deduct DDT before declaring a dividend.

The dividend distribution tax (DDT) will hit those who have opted for the regular dividend option in equity funds. A systematic withdrawal plan (SWP) could be a suitable alternative now for those opting for dividend plan option for investing in mutual funds.

Capital Gains Tax

Redemption of a mutual fund under SWPise subject to tax depending on the category of the funds you own. Debt funds and equity funds are taxed differently. SWP redemption is as per first in first out (FIFO) method wherein units first bought are assumed to be redeemed first.

Here is the Summary of Tax on capital gain from all type of mutual funds.

Capital Gain taxation on different types of mutual funds

Type

Short-term capital gains tax

Long-term capital gains tax

Equity mutual funds

15%

10% without Indexation

Balanced mutual funds

15%

10% without indexation

Debt mutual funds

As per tax slab

20% after Indexation

After the government introduced the Long Term Capital Gains (LTCG) tax on equity investments for gains over ₹ 1 lakh p.a., the dividend option has become unappealing to many investors and they are shifting to SWP.

On the other hand, in the case of SWP, you get a fixed amount at whatever interval you opt for. If the fund’s performance is good, the SWP will last longer. If the performance is poor, it’ll finish sooner.

10. Setting up SWP

For mutual funds investors, all they will require, is a SWP form which may also be known as a distribution form for setting up SWP plan to their investment.

Investors can determine various distribution schedules including monthly, quarterly, semi-annually or annually. Accounts typically have a minimum balance requirement for beginning systematic withdrawals.

SWP will ensure a fixed amount coming to your bank account, on a fixed date just like salary income. The investor just has to invest a lump sum amount initially in a particular scheme.

SWPs can attract exit load if started immediately. So it is advisable to set up the SWP a year after the initial investment is made.

If one invests an appropriate amount in right mutual funds when he/she has a regular income, SWPs can be set up during the retirement years for regular income.

Conclusion

In general, SWP scores over dividend strategy on most fronts. However, SWP works better when a person has invested and accumulated a significant sum (with respect to the withdrawal one is seeking). In a small investment, if the return generated is less than the regular payouts, it will fast erode capital.

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